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2017 Small Firm Financial Reporting Report, Submitted to FINRA

SFAB Financial Reporting Report                    May 31, 2017

All Reports
Member firms request that FINRA notify firms by e-mail AND through the Gateway immediately prior to (day before), the day of, and immediately following (if a firm misses a filing deadline) an eFOCUS filing deadline so the firm can take action. Let’s use some of FINRA’s technology to assist member firms, especially small ones, in their compliance efforts.

We would like to request that firms that either are not permitted by their Membership Agreement or that do not, by way of their business model, provide custody services to their customers or any party should be exempt from the quarterly Form Custody filing requirement.

The current filing mandate for firms that do not provide custody services is a source of frustration for member firms and has led to accumulated negativity toward FINRA within the small firm membership. In an effort to reduce the regulatory reporting burden on these firms, the SFAB subcommittee feels it is important that we review appropriateness in regard to the current set of required financial reporting obligations for small firms.

Another couple of notes from the subcommittee on the Custody Report: 1) eliminate the questions about affiliated RIAs, specifically because there is not a field on the Form BD regarding affiliation with an RIA, and 2) Move Item 1, Item 5, Item 8 and Item 9 to the beginning of the report and then an option to check “No” or “N/A” for the rest of the report.

Off Balance Sheet (OBS) 
Firms claiming a de minimis exception to the OBS filing requirement must affirmatively indicate so through functionality on the eFOCUS system that no filing is required for the reporting period. The vast majority of small firms will be claiming an exemption because their net caps are well below ten million dollars. In light of this, and because an automated cross-reference by FINRA to the FOCUS II to confirm the exemption is very doable (and recommended), we request that FINRA implement a one-time self-executing exemption election by firms (rather than every filing period). 

At any point in time should a firm’s status change and the election no longer be appropriate, the firm retains both the obligation and the ability to withdraw their exemption status and make the filing. 

With both the Custody and OBS report obligations, small firms are exposed to regulatory liability that, from their perspective, is difficult to justify when it does not apply to their model. When net capital of 10 million is the floor that triggers a filing obligation, is it perhaps possible for FINRA to utilize the data on file already to automatically exempt the sub-10 million firms? When reporting obligations make no sense to small firms, due to their inapplicability to the business model, frustration and resentment builds; this is undesirable and counterproductive to constructive engagement with our members. Together, let’s try to fix this.

The question is repeatedly asked, “Why is this filing required if the set is null?” Small firms would once again ask for relief from filings that do not apply to their business model.

The SIS is an expansion of Form II and should be updated to automatically populate respective fields with data previously entered and submitted on the FOCUS II report.

Balancing issues. In the Equity section (pg 6), capital/net income/distributions, the total equity populates with the total equity from page 2, but it does not add the columns to calculate the equity. This is very confusing to many firms. Further, if you are off by a dollar your filing rejects and when your column does not add up to equal the populated field, the firm receives a message that the line item is out of balance, but they do not know why (where is their error or out of balance condition) because they are looking at the correct total. The SFAB requests that FINRA not populate that field, rather instead add up the field entries, provide a pop-up to the right informing the firm where they are off (out of balance with pg 2), and implement a rounding error allowance.

Page 6 – Statement of Changes in ownership equity – Item #4240 (beginning equity) should be auto-populated with the corresponding information from the prior FOCUS Report (unless this is the first FOCUS Report).  The same is true for item #4300 for those broker/dealers that have subordinated debt on their books.

Updated instructions confirming areas that no longer need to be population; new broker/dealers are always confused about the “this report is being filed pursuant to...” (top of cover page) and the “execution” section (bottom of cover page). These sections were designed back when the form was filled out manually and signed. They are no longer necessary and these sections should be removed from the cover page or, at a minimum, a clarification should be printed that these sections may be ignored.

Cover Page. Broker/dealer name and address is hard coded onto the first page.  eFOCUS generates future blank filings in the web queue for the next 3 – 6 months.  If a broker/dealer changes their name or address with FINRA, there is no provision on eFOCUS to overwrite the old address or name.  While FINRA is not concerned with this, broker/dealers sometimes use these reports for other purposes and it appears both sloppy and, more importantly, inaccurate.  For example, some states and E&O providers request a copy of the most recent FOCUS filing and it can get confusing and create problems for firms when the name and/or address are listed incorrectly on this regulatory report. The SFAB requests FINRA resolve the issue of system update delays in regard to this item.

Page 4 – Item #3756 – minimum required net capital – 6 2/3% of A.I. – this field calculates the wrong amount for broker/dealers that have been approved in the last 12 months.  New broker/dealers are required to have 12 ½% of A.I. in this field.  Approximately one year ago this issue was sent to the eFOCUS web design team and a fix was coded.  Unfortunately, the fix as reported to us was not workable; we request this be readdressed in consultation with the SFAB (let us test it prior to roll out).

District Interpretations Differ. Different districts have different rules or, more precisely, differing interpretations of rules. For instance, M&A firms; one district instructed a firm to enter their income on the Investment Banking line. A second M&A firm in another district, instructed the firm to enter their income on the Other Income line. This has also happened with private placement income, mutual fund income, commodities income, securities positions, etc. The SFAB respectfully requests that the matter of having one set of rules for the breakout and reporting of income be resolved so that members may enjoy consistency from one district to another. (Then we can extend this into firm training webinars.)

Supplemental Statement of Income (SSOI)
This report is extremely time-intensive for small firms to complete, principally because clearing firms do not provide information to small firms this way. Clearing agent monthly report sets typically provide transaction data by TD, SD, or broker, not by product, so the SSOI entails a manual process of collecting the data in order to comply with the reporting requirement. FINRA has stated they use the detail, but none of us have seen any proof of that. The SSOI takes a long time to put together, so we would like to ask FINRA how are you using these breakdowns?

The SSOI is an expansion of Form II and should be updated to automatically populate respective fields with data previously entered and submitted on the FOCUS II report.

Page 1 – section 7 – Interest income – there are EIGHT different types of interest to break down, but no dividends; dividends should be added to the form.
Page 4 – section 17 – G&A expenses – a glaring omission is insurance and depreciation expense.  These are very common expenses and can sometimes be high enough to create the extra effort of listing them individually in the “other expense” section.

What is the purpose of this report?
What does FINRA do with this information?

Additional Items of Interest
FOCUS-related follow-up. One of the biggest eFOCUS issues with FINRA is how slow they are to follow up on eFOCUS-related issues. The eFOCUS system compares the current filing to prior filings and generates a report with a list of questions that the district examiners are then required to follow up on for each exception.  In many cases the examiner knows the firm and can address the exception without contacting the firm. However, what we have found is there still exists a problem with firms receiving calls months and months after a FOCUS filing because an examiner was behind on their reviews. Firms then have to go back and dig up old financial information to address an exception that is now irrelevant.  It would seem that the whole point of the FOCUS exception report review process would be to address financial exceptions in real time.  Brainstorming: Why doesn't the eFOCUS system require the firm to address these questions when they file the FOCUS filing?

Capital Additions.  The eFOCUS system should automatically set up a request in Gateway to upload the corporate minutes, evidence of funding etc.  Firms have gotten calls 8 months after a capital addition requesting this data.  It would be more efficient for all parties to have the firm take care of it as it happens, as opposed to waiting around for an examiner to request it.
A FINRA-sponsored web-based Q&A site that can be devoted to individual sections of the FOCUS and SSOI form would be very helpful  (one section for assets, another for liabilities, another for net cap comp and so forth). There should be the ability to submit questions and (with FINRA oversight) to share solutions amongst FINRA members and other helpful info to cover special situations.

The Small Firms Advisory Board would like to thank FINRA for the opportunity to participate in the financial reporting review process. If there are any questions regarding this report please feel free to contact me directly.

Thank you,
Paige W. Pierce
Chair, SFAB (2017)

Paige Pierce